Broad Based Indexing Still Requires Work

IndexUniverse reported that Van Eck has filed for a Market Vectors ETF that will be broad based exposure to China. The difference with this fund is that it will offer a combination of access to the A-share market, B-share market, H-share market and red chips.

I am all for fund companies coming out with as many funds as they can afford and I would say the narrower the better as very narrow funds can be a better substitute for an individual stock than a broad sector fund (example; XLE would be a lousy proxy, on a relative basis, for uranium); I was calling for a fishing ETF two or three years before it listed.

This new China fund is very likely to be heaviest in financial stocks as every large cap China ETF is (or so it seems anyway). Assuming that will be the case with this new fund, which is a good bet, then it will probably be better left alone. To repeat something I've said many times, if there is going to be trouble in China the banks will be ground zero which will crush all of these broad based funds that are 30-40%, or more, in financial stocks.

Obviously there are investors for whom broad based funds are the best way to go but that does not mean that these investors should not look under the hood, try to understand what is there and make a decision or two about what to avoid. This will make the task a little more difficult but more difficult is a better outcome than getting hurt if there is a serious consequence to owning, in this case, Chinese banks. I would encourage broad based investors that want to own China to figure another way to do it.

Figuring a couple of things to avoid, even for broad based investors, may not mean you outperform the market but will probably spare some anguish.

Avoid most banks and long dated US treasuries.